Trade War: Hedge funds diving for cover in China

Bloomberg|

Updated: Jun 22, 2018, 10.43 AM IST

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NEW YORK: Donald Trump’s threats of a trade war with China is sending jitters through the hedge-fund community.

Pinpoint Asset Management and SPQ Asia Capital have recently cut a measure of risk called net exposure — the difference between bullish and bearish bets — for hedge funds that invest in China. FengHe Asia Fund, which focuses on China, Taiwan and Vietnam, has reduced its allocation to Chinese stocks to the lowest level since 2012.

“The trade spat is the last straw,” said Matt Hu, co-founder of Singapore-based F&H Fund Management who manages the $240 million FengHe Asia Fund, who started paring Chinese financial and manufacturing stocks last year in favor of Vietnamese companies.

China’s equity market has been recovering from its mid-2015 crash, helping power the best performance in eight years in 2017 for hedge funds investing in the region. But the gains are imperiled by Trump’s determination to wring concessions from Beijing. Elevated USChina tensions spiraled into threats of tit-for-tat tariff retaliations this week, which some analysts predict could cut as much as 0.5 per centage points off China’s economic growth. The Shanghai Composite Index fell 4.8 per cent this week through Thursday Some domestic managers and offshore China hedge funds have reduced their holdings amid growing trade worries, William Ma, chief investment officer of the $23 billion Gopher Asset Management unit of Chinese wealth manager Noah Holdings, said in an interview. Average net exposure for Asia longshort hedge funds has dropped to 40 per cent , from about 50 per cent , over the first four months of this year, said Richard Johnston, Asia head of Albourne Partners.

“Many still don’t think fundamentals have changed, so I didn’t expect to see a large reduction,” said Johnston, whose firm advises clients on more than $450 billion of alternative investments including hedge funds. “Most have learnt from experience not to try to time the market. The last few days may have spooked some a bit.”

A Eurekahedge index tracking Greater China-focused equity longshort hedge funds gained 4.6 per cent in the first five months, far behind the 32 per cent surge for the full year of 2017.

Pinpoint Asset Management slashed net exposure in its roughly $1.4 billion China-focused hedge fund by about 20 per cent to the lower half of the 30 per cent to 50 per cent range it has historically maintained, said Curtis Man, a Hong Kong-based executive director. SPQ Asia Capital has cut the same risk measure of its Greater China long-short equity hedge fund by about 10 per centage points this year, said Chief Operating Officer Gregoire Dechy.

Pinpoint, which oversees $3.7 billion in various funds, had cut its exposure as early as last and increased it after market selloffs earlier this year. Over the past two weeks, it reversed course again as tensions started to flare up.

Pinpoint has also turned cautious towards Chinese companies with export-dependent businesses since the beginning of the year, said Man.